Your Company is considering for demerger of one of its division and requested you to prepare a note on amortization of expenditure, carry forward and set off of business losses and unabsorbed depreciation as per the prov

As per Income Tax Act, 1961 demerger in relation to companies, means the transfer, pursuant to a scheme of arrangement under Companies Act, 2013 by a demerged company of its one or more undertakings to any resulting company subject to conditions specified. The company before undertaking the demerger should consider the below mentioned provisions of Income Tax Act, 1961 with respect to the amortization of expenditure and carry forward & set-off of business losses and unabsorbed depreciation respectively: Amortisation of expenditure in case of amalgamation or demerger Section 35DD (1) of the Income Tax Act, 1961 provides that where an assessee, being an Indian company, incurs any expenditure wholly and exclusively for the purposes of demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the demerger takes place. Further, as per section 35DD (2) of the Income Tax Act, 1961 no deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act. Carry forward and set off of business losses and unabsorbed depreciation of the demerged company Section 72A (2) of the Income Tax Act states that notwithstanding anything contained in sub-section (1), the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless- (a) the amalgamating company- has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years; has held continuously as on the date of the amalgamation at least three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation; (b) the amalgamated company- holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation; continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation; fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose. In a case where any of the conditions laid down in sub-section (2) are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with. [Section 72A (3)] Section 72A (4) of the Income Tax Act provides that notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall- (a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company; (b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be. Section 72A (5) of the Income Tax Act the Central Government may, for the purposes of this Act, by notification in the Official Gazette, specify such conditions as it considers necessary to ensure that the demerger is for genuine business purposes.